A Company's Purpose

May 13, 2018

I used to teach finance courses. Inevitably the question, “What is the purpose of a company?” would come up. Like robots, students answered, “To increase shareholder wealth.” Frankly, this answer terrified me. Was this really what we were teaching them? Increasing shareholder wealth is necessary for survival, but shareholders are only one of five constituencies of a corporation. The other constituencies are employees, the government, the community, and debt holders.

The five constituencies of a corporation

Let’s discuss the easy ones first—debt holders and the government. Debt holders need to be paid. A soaring stock value or share buy-backs help shareholders, but debt holders want to see cash flow. The company needs cash to make interest payments and to pay off bonds. Like all of the constituencies, debt holders want to see a successful company, but they are looking at a different line on the balance sheet. The government wants taxes paid, regulations followed, and laws respected. Pretty simple.

The next two, employees and the community, get a little bit stickier. Maslow’s pyramid is a good guide for employees. First, employees need a living wage and a sense of job security. Second, they need to feel safe at work, protected from physical danger. Third, employees require some social comfort in the work environment. They need to work free of bias from discrimination due to race, nationality, gender, or a sexually hostile environment. If this social element is missing, the safety step can become threatened.

Maslow's Pyramid

Finally, the company needs a good relationship with the community where its operations are settled. When the community feels safe and supported by the company, the community reciprocates by providing willing employees and a trusting attitude.

Even with these glossed over explanations, satisfying these constituencies is a lot more than simply increasing shareholder wealth.

The chemical industry is an excellent example of how critical these other constituencies are to a successful company. For most chemical companies the safety of their employees and the community is listed as the company’s first consideration. Employees are trained in safe operation of the equipment, what to do in an emergency, and what you absolutely never, ever do. In fact, I cannot go to visit a chemical company headquarters, a simple office building, without watching a safety video about safe practices and what to do in an emergency.

In the communities surrounding chemical plants, management has a close relationship with community leaders. Nearly all chemical producers are signatories to the global Responsible Care program that pledges “to improve environmental, health, safety and security (EHS&S) performance for facilities, processes and products throughout the entire operating system” (American Chemistry Council).

Indeed the chemical industry’s relationship with the government is far different from almost any other industry. Safety, production standards, water and waste disposal, air quality, transportation, and just about everything that goes on in a chemical plant is regulated by the government or subject to some oversight agency. In this instance, the industry not only must follow the regulations, but help to formulate them because of the rapid development of new technologies and products.

Finally, because its industry is truly global, with operations all over the world and products shipping across oceans, chemical producers must have highly developed ethical guidelines and a superior knowledge of the laws on conducting business. Due to its inherent complexity, a chemical company has a special obligation to all of its constituencies.

Chemical companies have been turning to Nexant’s Energy & Chemical Advisory for forty years for insights about government regulations, safety, and financing. Nexant contributes to business solutions that increase profitability, yes, but also take into account its clients’  whole ecosystems.

You might now see why I, as a proud member of this industry for forty years, am terrified by those who name “increasing shareholder wealth” as the singular objective of a company.